Railway Exam » Railway Exam Study Materials » General Awareness » Impact of NPAs on Industry

Impact of NPAs on Industry

NPA or the non-performing assets are the loans or the advances on which the payment of interest had remained overdue for 90 days in most cases. Let’s study the impacts of NPA on industries.

The non-performing is termed as any loan on which the interest had been overdue for 90 days or more in cases other than agricultural loans. RBI states that an asset that stops generating income becomes a non-performing asset. It had a great impact on different sectors such as banks and industries. NPA reduces the profitability of banks to a very great extent. If we talk about the industry, there is a decrease in profitability of the manufacturing sector due to the slowdown in growth in the post-demonetisation period. Demonetisation has greatly affected banks and industries positively and negatively. It causes the banks to stall the credit growth to the sector of industries. Let’s study the NPA, its causes, and its impacts in detail.

Classification of NPAs

The banks classify NPAs into three primary categories to evaluate and maintain provisions as the prescribed class of assets:

1. Substandard assets: Any asset that has been in the NPA for only 12 months or lesser, these types of assets are Substandard assets.

2. Doubtful assets: Any asset that is found to be non-performing for more than 12 months is a doubtful asset of NPAs.

3. Loss assets: The loss assets are the case of non-payment for a longer period. In this case, the banks, auditor, or inspector identifies the loans that will never be repaid and should be fully written off.

Impact of NPAs on Industry

  • From 2006 to 2011, the credit growth (demand for loans is termed credit growth) in the industrial sector was greater than the over credit growth. This causes the rise of NPAs proportion in the industrial sector than in all other sectors. 

  • Later, the banks were unwilling to fund these industrial sectors to meet their needs and obstruct their growth. This causes the shrink of credit in many enterprises. There was a decrease in profitability of the manufacturing sector due to the slowdown in growth. This leads the banks to stall the credit growth to the industrial sectors. 

  • The growth of the industrial sector is greatly affected by the shortage of funding in the long run.

Impact of NPAs on Banks

The banks serve as the wheel of the Indian economy and collect and lend money to the Indian citizens. The bank functions with the difference in net interest income. The impact of NPAs on the bank can be in different ways, such as:

  • If the NPAs continuously rise, it can create a negative image of the banks. Moreover, the account holders shall want to withdraw their money from these banks. This will negatively affect the profitability of the bank and can even lead to the collapse of banking.

  • It will prohibit the bank from lending any money that contributes to the country’s economic growth. It will eventually cause inflation, unemployment, etc.

  • Now, the banks will have no choice but to increase the interest rates, harming the country’s economy.

Causes of the NPA crisis in India

The major causes of the NPA crisis in India are as follows:

  • The Indian economy was flourishing in the early 2000s. Thus, many companies took loans from the banks. The businessmen took loans to fund their projects. The banks had invested in many companies at that time. The companies were unfeasible and incurred losses. Due to the unfeasibility of these companies, there was an impairing in balance sheets by 2013. Most of the current NPAs of the bank are from these unpaid loans. The causes of the unfeasibility or incapability to carry out their functions can be the rising costs, the recession of 2008, etc. 

  • After the survey of RBI over the books of banks, they found that there were thousands of crores of wilful defaulting. A wilful defaulter is a person who willingly does not carry out his obligation even when he could have. Thus, RBI concluded that this was due to the negligence of banks on the credibility or creditworthiness of persons and the corruption.

Strategies to Solve the Problem of NPAs (Non-Performing Assets)

The strategies to solve the problem of NPAs in India are as follows:

  • To tackle the NPA problem, the senior executives should be accountable.

  • Improvement of Corporate governance.

  • Strict laws should be made for the NPA recovery.

  • Effective Management Information System (MIS) should be implemented for effective credit risk management.

  • Setting up of assets reconstruction companies for the checking of stressed assets.

Conclusion

As per the definition of non-performing assets, NPA is the loans or the advances on which the payment of interest had remained overdue for 90 days. The bank classifies NPAs into three primary categories, i.e., substandard assets, doubtful assets, and loss assets. The substandard asset is any asset that has been in the NPA for only 12 months or lesser, whereas the doubtful asset is any asset that is found to be non-performing for more than 12 months. Moreover, the banks or any inspector identifies the loans that will never be repaid in the loss assets and should be fully written off. The NPAs affect different sectors such as industry, economy and banking in India. There was a great reduction in the profitability of banks and industries due to these NPAs.

faq

Frequently asked questions

Get answers to the most common queries related to the Railway Examination Preparation.

State the adverse impact of NPAs?

 Ans. NPAs affect NIM (net interest margins) drastically. According to the de...Read full

State the cause of the continuous increase of NPA in India?

Ans. The main cause of the increase in NPA is the low earnings prohibiting paying back loans. Moreover, the relaxed ...Read full

State the meaning of the capital base and its types?

Ans. The capital base is a term that investors or banks use for referring to the level (base level) of funding.

 

State the ways of solving the problem of NPAs in India?

Ans. The ways of solving the problem of NPAs in India can be by making the senior executives accountable, improving ...Read full